4Kids Entertainment Q4 2007 Earnings Call Transcript

Mar.17.08 | About: 4Kids Entertainment (KDE)

4Kids Entertainment, Inc. (KDE) Q4 2007 Earnings Call March 17, 2008 9:00 AM ET

Executives

Todd Fromer – Managing Partner of KCSA

Alfred R. Kahn – Chairman of the Board & Chief Executive Officer

Bruce R. Foster – Chief Financial Officer & Executive Vice President

Analysts

Liam Burke – Ferris, Baker Watts, Inc.

Joe Hovorka – Raymond James

Operator

Good morning my name is Natasha and I will be your conference operator for today. At this time I would like to welcome everyone to the 4Kids Entertainment 2007 fourth quarter and yearend earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer period. It is now my pleasure to turn the floor over to your host Todd Fromer, Managing Partner of KCSA. Sir, you may begin your conference.

Todd Fromer

Good morning everyone thank you for joining us today for 4Kids Entertainment 2007 fourth quarter and yearend earnings conference call. Before we begin I must state that the information contained in this conference call other than historical information consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable it can give no assurance that such expectations will prove to have been correct. Important factors beyond the company’s control including general economic conditions, consumer spending levels, competition from toy companies, motion picture studies and other licensing companies, the uncertainty of the public’s response to the company’s properties and other factors could cause actual results to differ materially from the company’s expectations.

With nothing further, I’d now like to turn the call over to Al Kahn, Chief Executive Officer of 4Kids Entertainment. Al, the floor is yours.

Alfred R. Kahn

Good morning everyone. First of all I’d like to comment on the 2007 results and the impact of our accounting rules on those results. The company’s 2007 results, a loss of $16.8 million in the fourth quarter and a $1.77 per share for the year obviously terrible and disappointing. However, I think it is important to put our results in context. A substantial portion of the fourth quarter 2007 full year loss is attributable to the reserve against the deferred tax assets. While I’ll leave the tangible discussion of the account principles to our CFO Bruce Foster who can describe the financial impact that taking the reserve had on the company’s 2007 results.

For the first three quarter of 2007 the company reported financial results net of the tax benefit that the company realizes from reporting a loss. The tax benefit serves to reduce the overall amount of the loss. For the full year 2007 the company has reported its results without the tax benefit for the loss of 2007. The net effect of reporting the company’s results without tax benefit is to increase the company’s lose for 2007 by $11.9 million or $0.90 per share. There’s potential a silver lining however to this accounting treatment as the company returns to profitability the accounting literature provides that the company may recognize some or all of the tax benefits in its 2007 losses which would result in an increase in our reporter earnings if and when the company uses the tax benefit. So, theoretically, almost $0.90 of the $1.77 was that accounting charge.

Our 2007 results were also affected by the Chaotic related startup costs. We began selling Chaotic trading cards in the comic and hobby distribution channel beginning in late October 2007 and since some of the initial shipments of Chaotic trading cards were sold on a returns basis, the company recognized only $700,000 in revenue from sales of Chaotic trading cards in calendar year 2007. Only the 4Kids 2007 financial results reflect virtually an entire year of startup costs for our trading card company TC Digital Games, LLC and our website company TC Digital Websites. These costs totaled approximately $8.5 million and net loss for our new businesses was about $0.50 per share. Finally, our $81.4 million total cost and expenses for 2007 includes the approximately $8.5 million of startup costs associated with TC Digital and TC Websites. If we did not have those 2007 startup costs and we were comparing the approximately $81 million in total expenses for 2006 with the total expense of 4Kids in 2007 without the trading card company and the website company there would have been a year-to-year decline in expenses of approximately $8 million.

As I mentioned before in previous conference calls we’ve used our expense cuts to in effect fund the startup of two new businesses which we believe will contribute significantly to building shareholder value. So, if you took those two numbers, the $11.9 and the $8.5 and put them into context we would have had a net loss if you compared apples-to-apples of about $0.27 per share as opposed to the $1.77 that was recorded. Obviously, by no means it the $0.27 a share a number that I am proud of a number that I would accept but certainly I want to put in context that the results are skewed based on the facts I mentioned.

Although 2007 was a difficult year for the company from the point of view of financial results, we started to turnaround and created a number of significant milestones. First, we shipped starter decks and booster packs of the Chaotic trading card game which hit the shelves in comic and hobby stores channel distribution on October 24, 2007. Secondly, the public beta version of the Chaotic website at www.ChaoticGames.com launched on October 24, 2007. Third, in early October 4Kids entered into a deal with the CW Network to programming CW on Saturday morning beginning with the 2008/2009 broadcast season. We believe that the 4Kids CW deal has the following advantages for us: as you know, it’s a five year deal enabling us to make long term programming commitments that ensures 4Kids that network television distribution for 4Kids owned or license content. Our as sales guarantee 4Kids to CW this $15 million a year, with also a substantial number of additional national units to sell on the five hour CW Kids block if compared to the four hour block on FOX. Assuming our ratings and [CPNs] approximate the ratings and [CPNs] that we currently have on FOX, we believe that our ad sales for CW more than cover our $15 million hour guarantee. The additional ad revenues will hopefully substantially reduce the losses and add television operations savings going forward.

The CW Network has clearances in the top 50 markets, the CW Network branded stations. So, in other words, every station that carries our programming in the top 50 markets have CW call letters. Under our FOX deals 4Kids TV is not carried in Atlanta, Birmingham, Greensboro and Austin. In addition, 4Kids had to separately play for clearances in Detroit, Milwaukee and Miami to carry 4Kids TV. We also have not sports credentials on the CW a problem we experienced frequently with FOX’s telecast of major league baseball and the NFL. We also have more promotional time for the Kids block on the CW than it had on FOX also the [inaudible] promoting the 4Kids TV on FOX because in a substantial number of markets 4Kids is on a secondary stations that were not FOX branded affiliates so in other words we were on their dual operating markets, we might have been on a station that was not a FOX branded station therefore how do you promote nationally your programming when you can’t talk about being on FOX because some of the stations, approximately maybe even 50% of them were dual operated.

We also found that sometimes the shows was not programmed to run day date in other words some of our blocks were run on Saturday, Sunday mornings and some of our blocks even on Saturdays would run from seven to 11 as opposed to the eight to 12 block we currently have on FOX in some markets. On CW we’ll be day date constant and then obviously, if we want to promote our shows we can say, “Turn to CW Saturday at eight o’clock.” In that case obviously we’re on from seven to 12 starting in September and that Saturday at eight o’clock the show will be seen across the nation on the same time and same date. With all that, our ratings have been consistent with all the other broadcast networks and actually we’ve been trending upwards recently which is a testament to the shows and the quality of the shows that we’re putting on the air. During the net broadcast season, during the 2008/2009 we’ll be programming both FOX and the CW and 4Kids will reap the benefits of the CW deal and it the successive four broadcast seasons we would expect to be programming only the CW Network. Another important issue is that we meet our representation [inaudible] a number of our key clients including The American Kennel Club, Live Nation Monster Jam and [inaudible] International for the dog and the cat.

Let me talk about what’s the most important issue about this conference call and that’s Chaotic. We released the Chaotic trading card game in small quantities to the comic and hobby channel of distribution beginning October 24, 2007. The initial response was very good. We supplemented the comic and hobby channel distribution in very late December and early January, 2008 by distributing the Chaotic trading card game at FYE and GameStop. We began mass market distribution of Chaotic in mid January, 2008 when the trading card game went on shelve at Toys R Us and Target. Several weeks later in early February Chaotic became available at Wal-Mart. The mass market release has been accomplished by an advertising [inaudible] the company by major advertising with both television and web advertising. We now have achieved broad distribution of the Chaotic game with the presence at over 15,000 retail outlets.

I don’t know if anybody knows anything about retail but to get into these stores as quickly as we have and the number of stores we have is extraordinary. I’m so pleased to report that so far the Chaotic trading card game is selling well. We’ve received reorders from Target, Wal-Mart, Toys R Us and the many comic and hobby stores that carry the Chaotic trading cards. We’ve also had strong sales in Canada where the Chaotic television show is broadcast on Teletoon. We are on pace to sell approximately $3.5 to $4 million of cards in the first quarter of 2008. If you look at Canada, another thing that I think is important to note is that some retailers are telling us that in Canada the Chaotic trading card game is the number one trading card game outselling both Pokemon and Yu-Gi-Oh. We’ve also been told that in some retailers in the states they are putting the Chaotic cards into multiple areas of the store. Right now trading cards in most cases are carried by the front registers especially in Target, especially in Wal-Mart and now we’re being told that a number of these retailers are also putting us into the toy department which gives us additional space, additional inventory, additional sales.

If the Chaotic trading card game were to continue its sales performance and ramp us as expected in the fourth quarter 2008 we currently project our 2008 sales will range between $20 and $30 million. If we are correct about these projections and let me emphasis we’re only in the second full month of mass market sales, we’d expect to recoup a substantial portion of our investment in Chaotic in 2008. We also expect that being able to build on the initial success of Chaotic in future years, as successful card games typically have relatively lengthy life spans as we know from our experience with both Pokemon and Yu-Gi-Oh. We will continue our advertising promotional ad campaign throughout most of 2008. We’ve begun to broadcast two episodes per week of Chaotic on 4Kids TV and we are beginning to see improvements in Chaotic television ratings. For example, in two of the three last [inaudible] Chaotic was the number one rated show for boys six to 11 on broadcast television. We’re also beginning to license the Chaotic television show outside the US. As I mentioned before, Chaotic is broadcast on Teletoon in Canada and is one of the top rated shows. Our Chaotic trading card sales in Canada are very, very strong. We’ve also placed the Chaotic television show in a number of markets in Europe and Australia. We are working to translate the Chaotic game into the French, Spanish, German and other major European languages so that the card game can be distributed in non-English speaking countries. We’re also in the process of turning a version of the Chaotic website in the major European languages so the kids outside of the United States can access the Chaotic website, web share their cards and play the Chaotic game online.

The Chaotic website continues to build. We have over 330,000 registered users and over 7 million cards have been uploaded. [Inaudible] and website are extremely positive. As the sale of Chaotic trading cards continues throughout the year we expect website traffic to increase substantially. We will be outing additional functionality to the website so it can better serve all Chaotic fans of all ages and game playing skills. We’re also noticing that kids certainly want to play these cards games in person and that actually the first preference is to play the card game traditionally, get good at it and then go to the website in terms of showing off your performance. We have started and we are starting organized play in stores and obviously that organized play will be involved with a number of the retailers that are carrying Chaotic cards and we know that when we do organize play from our Pokemon and Yu-Gi-Oh experience it not only raises the degree of kids coming into the stores but it raises the degree of purchasing of these different packs. We’ll be shipping our first new booster of Chaotic obviously in the end of the first quarter beginning of the second quarter and we expect sales to continually move upward. So, the Chaotic news is very, very positive and I think we all see that the investment we made in Chaotic could become one of the more significant investments the company has ever done.

Continuing our 2007 review, as expected the company had another challenging quarter. Licensing revenue in the fourth quarter was $6.3 million down from approximately $7 million in licensing revenue earned by the company in the fourth quarter 2006. Year-over-year the licensing segment was down by approximately $9 million in 2007 as compared to 2006. In addition, the television and film distribution segment was also down substantially resulting in a $16 million in overall revenue decrease to $55 million compared with $71 million in 2006. The overall revenue decline especially in licensing depressed results obviously in 2007. While in 2007 we got some increased revenue from Teenage Mutant Ninja Turtles property due to the 2007 release of the Turtle’s feature film and Turtle’s DVD the increased Turtles revenues was not sufficient to offset reduced licensing revenue both domestically and internationally from our other properties.

The 2007 results are real indicative to how crucial it was for the company to cut cost and invest significant resources in new business initiatives, TC Digital and TC websites. While trading card sales contributed only $700,000 in 2007 we expect Chaotic trading card revenues to be a significantly greater contributor in 2008 and beyond. We also obviously are building platforms to use the coding feature on the Chaotic game in other [inaudible] properties. We are in the process of planning additional releases of additional new games that will take advantage of the patented technology that’s available on our website and on our cards.

Let me spend a couple of minutes on 2008 prospects and our roster of properties. First, the TV properties that are broadcast primarily in 4Kids TV which we have rebranded as the Game Station. As you know, we rebranded that because we believe that the sweet spot for kids going forward is video games and online games. As you look at the toy business even though the toy business has been very, very solid, the game skewing of the toy business keeps on compressing. And that now the sweet spot you could argue was from two to six and that as soon as the kids are able to get on they are able to go right to the web and [inaudible] online. If you look at the video game action in terms of Nintendo and obviously all of the video game companies, the business is incredible as well as the online gaming business is growing exponentially. Then eventually it’s not that we expect a cut in the toy business necessarily but it certainly is continuously shrinking the toy businesses ability to expand amongst its current age perimeters.

We also believe the economy is going to have a very big impact on what goes forward. We’re going to see obviously, major increases in the toy business. We’re going to see of the obvious problems in terms of paint resulting in more testing. You’re going to see from the fuel oil problems higher plastic costs, higher transportation costs which also will have probably negative ramifications at some level for the toy business because they’re going to have to raise prices and obviously major retailers are very reticent about taking over certain traditional price points. On a card basis this works in our favor because our trading cards are printed in the US and that we can ship them on an as needed basis and it’s a low price point so we believe that if the economy’s current state gets a little bit weakened and people want to try and not spend as much money on kids products that our segment because it’s a combination of trading cards and online will have a very, very substantial ability to take some of that pressure and be able to sustain continued growth.

[Inaudible] as I mentioned the launch of Chaotic trading card game, the website, we are very pleased with the performance of Chaotic to date and we continue to monitor its progress and continue to add more features and functionality of the website and more excitement to the gaming environment. What I’m suggesting is we’ll have multiple different types of games available, a 1B1 game which is for beginners, we’ll have a 3x3 master game up now, the 6x6 master game will be up in a couple of months, additional website features continually in community play, additional card sets based on the new booster set will come out in about a month with 200 additional new creatures. This is all building the excitement. If you look at other things that have had similar builds, Webkinz took almost three years to build to where it is today. If you look at other types of situations they all had a tendency to take some time to boost community. We’re doing extraordinarily well in a short period of time.

Teenage Mutant Ninja Turtles, Turtles series on 4Kids TV continues to be the highest rated show in our block. Turtles continues to show strengthen at retail as the new Turtles miniatures line from Playmates has been selling well. Turtles in 2007 was helped by a TMNT movie released in March and the DVD release in August. We’re working to sustain the momentum for Turtles in 2008/2009, the 25th year anniversary. This year we’re going to add a new turtle television show to our line ups. That line up will incorporate a new turtle show which the turtles are inside the space and it basically very much ducktails into the online experience and game experience that the branding takes account of. Yu-Gi-Oh and Yu-Gi-Oh GX continue to be the top three revenue producers to the company with the Yu-Gi-Oh trading cards continuing to be among the top sellers in the trading card market. We began broadcasting the Yu-Gi-Oh GX series this fall on 4Kids TV. Yu-Gi-Oh remains one of our core brands. This fall we expect to broadcast a brand new Yu-Gi-Oh show that is debuting in Japan next month. We believe that this new series will keep the Yu-Gi-Oh property fresh and provide us with additional licensing opportunities.

Obviously, Chaotic and Yu-Gi-Oh compete in the marketplace at some level and certainly we would hope that we could sustain Yu-Gi-Oh at a level that is significant as well as continue to grow Chaotic. Dinosaur King, we introduced Dinosaur King a new Japanese property from Sega at [inaudible] show in New York where it was well received. 4Kids represents TV rights, merchandising rights and home view rights to the property in the worldwide outside of Asia. We are very close to completing a massive toy deal, we’ve also licensed television broadcast rights to Dinosaur King series in major European markets. We expect to be able to create a significant worldwide licensing program for the property. It’s gotten terrific response all worldwide, we have tremendous sales in most major European markets and we expect this to add to revenues in 2008. Viva Piñata, we’ve licensed the Viva Piñata television show to broadcasters in major markets around the world including the UK, France, Germany, Italy, Spain, Benelux and Australia and with Microsoft for releasing another Viva Piñata video game in 2008.

I just want to take a minute on our non-TV properties that are licensed through the company’s [inaudible] Cabbage Patch Kids, we’re working on various marketing initiatives to market the 25th anniversary of Cabbage Patch Kids. We expect Cabbage Patch Kids to be a key contributor to retailers and obviously to our revenues in 2008. AKC, Monster Jam and The Dog, these properties continue to do well for us and as I mentioned we have signed an extension to our representation agreement to these properties. The American Kennel Club licensee program continues to build in a variety of categories. The Dog continues to be very appealing promotional line for [inaudible] partners around the world such as McDonalds and Frito Lay.

Microsoft Xbox, we did a number of apparel and accessory deals for Microsoft Xbox which are selling well.

I think it’s interesting to note that in AKC that’s becoming the gold standard for accessories. If you go into any of the major retailers especially as you’re going through this year you’ll see Target, you’ll see obviously Toys R Us with huge representation from AKC products as consumers looking for that gold standard which AKC provides so that will increase our revenue base on a more consistent basis with these properties.

Obviously looking forward we are continuing our efforts to grow revenues and expect Chaotic trading cards sales to be a significant driver of revenues in 2008 and beyond. We believe that our current initiatives, the trading card and website companies, the CW deal will strengthen the company and provide the company with a solid foundation for the future. All these initiatives cost money which the compress results in the short run. All initially invested by 4Kids if necessary for 4Kids to remain the cutting edge of kids digital technology. As I mentioned before, we’re going to be starting platforms on 4Kids TV. Well, we continue to build the 4Kids TV brand platform and whether it’s TV or on the net as a great place for kids to spend their free time. 4Kids TV is being branded as the Game Station and kids network that broadcast anime series with trading card game or video game focus. We expect to capitalize on this programming of FOX and the CW this fall. Our web content, the company is focused on building a compelling web presence. We’ve upgraded our various websites, 4KidsTv, Yu-Gi-OhGx.com and our corporate website. We expect our Chaotic website to continue to gain users as the Chaotic trading card game is distributed in the marketplace.

Our revenues from websites forgetting about Chaotic will be in excess of 3% possibly this year of our revenues and that is the continuing growth trend that is very, very positive because it goes against our network advertising and our network expenses. We believe that we are on track for substantially greater web revenues in 2008 as compared to last year and that we will continue to build the website component of the non Chaotic websites. We are working to sustain our mature core brands, Yu-Gi-Oh and TMNT and CPK. We are continuing to market promote our new exciting properties Chaotic and Dinosaur King.

In our financial area we are continuing to maintain a strong cash position and debt free balance sheet so that we may have ample resources to market and promote our core brands and exciting properties and be able to pursue more opportunities and content distribution. I think it’s important to suggest that however horrendous these results look on paper a great percentage of them are onetime charges relevant to where we are in different marketing conditions. But, I think it’s also important to note that our, if you will, promises or our futures have never looked greater for the company as it does at this very moment and I ask you as shareholders and as partners to keep that in mind as you decide whether or not to continue to support us in the marketplace. Obviously, the financial markets are in a turmoil at this moment in time and obviously that may have some effect on our share price, it certainly may positively or negatively but from a standpoint of our marketing and sales I think we are in the same kind of place we’ve been in as before we launched other properties that turned into very, very major successes. So, I thank you for your support.

Let me turn over the call to Bruce Foster.

Bruce R. Foster

Good morning. I’d like to spend a few minutes reviewing with you the yearend financial results for the company. Revenues by reportable segment were as follows: in the licensing segment revenues for the quarter ended 12/31/07 was approximately $6.3 million as compared to $8.2 million for the same period in 06, a decrease of approximately $1.9 million. Revenues for the year ended 12/31/07 was approximately $22.6 million as compared to $31.7 million for the same period in 06 that’s a decrease of approximately $9.1 million. These decreased revenues were primarily attributable to decreased licensing revenues on the Yu-Gi-Oh, Winx Club and Pokemon properties worldwide, the GI Joe property domestically and the Teenage Mutant Ninja Turtles property internationally which were all partially offset by increase revenues attributable to the Teenage Mutant Ninja Turtles property domestically.

In the advertising media and broadcast segment revenue for the quarter ended 12/31/07 was approximately $6.1 million as compared to $5.6 million for the same period of 06 an increase of approximately $.5 million. Revenue for the year ended 12/31/07 was approximately $16.3 million as compared to $16.2 million for the same period 06 an increase of approximately $.1 million. Revenues for 07 were [inaudible] consistent when compared to 06. In the television and film production distribution segment revenue for the quarter ended 12/31/07 was approximately $3.4 million as compared to $4.6 million for the same period in 06, a decrease of approximately $1.2 million. Revenue for the year ended 12/31/07 was approximately $16 million as compared to $24 million for the same period in 06 a decrease of approximately $8 million. These decreases primarily resulted from decreased production service revenue for the Teenage Mutant Ninja Turtles, Pokemon and One Piece television series domestically as well as decreased broadcast sales for the Yu-Gi-Oh, [Unity Power] and One Piece television series internationally which were all partially offset by increased international broadcast sales from the Viva Piñata television series.

In 2007 the trading card and game distribution segment recorded its initial revenues of approximately $.8 million as a result of the October 07 launch for the Chaotic trading card game to comic and hobby stores as well as the small retail channels. On a consolidated basis revenue for the quarter ended 12/31/07 was approximately $16.5 million as compared to $18.3 million for the same period in 06, a decrease of approximately $1.8 million. Consolidated net revenue for the year ended 12/31/07 was approximately $55.6 million as compared to $71.8 million for the same period in 06, a decrease of approximately $16.2 million.

Now, turning to the expense side, selling, general and administrative expenses increased approximately $3.1 million to approximately $14.5 million for the quarter ended 12/31/07 when compared to the same period in 06. SG&A expense increased $5 million to approximately $44.2 million for the year ended 12/31/07 when compared to the same period in 06. The annual increases were primarily due to the increased cost of approximately $4.1 million and $4 million and related to the operation of the company’s newly formed ventures TC Website and TC Digital respectively as well as increased website costs of approximately $1.5 million primarily related to the redesign and upgrade of the www.4Kids.TV website partially offset by decreased personnel cost of approximately $2.7 million and decreased advertising and promotional expense of approximately $1 million.

Cost of sales of trading cards was approximately $1.4 million for the quarter and the year ended 12/31/07 and represents finished goods inventory costs related to the October 7 launch of the Chaotic trading card game. Production service costs for the quarter ended 12/31/07 were approximately $2.1 million as compared to $2 million for the same period in 06 an increase of approximately $.1 million. Production service costs for the year ended 12/31/07 were approximately $7.2 million as compared to approximately $11.3 million for the same period in 06, a decrease of approximately $4.1 million. These decreases were primarily due to decreased production cost for the Teenage Mutant Ninja Turtles, Pokemon and the One Piece television series partially offset by increased production cost for the work performed on the Dinosaur and Viva Piñata television series.

Amortization of film and television costs for the period ended 12/31/07 were approximately $3.5 as compared to $3.2 million for the same period in 06, an increase of approximately $.3 million. Amortization of film and television costs for the year ended 12/31/07 were approximately $8.2 million as compared to approximately $8 million forth same period in 06, an increase of approximately $.2 million. Amortization of television and film cost remains relatively consistent for the year ended 12/31/07 when compared to the same period in 06. Amortization of 4Kids TV broadcast fees for the quarter ended 12/31/07 were approximately $7.9 million as compared to approximately $7.3 million for the same period in 06, an increase of approximately $.5 million. Amortization of the 4Kids TV broadcast fees for the year ended 12/31/07 was approximately $21.5 million as compared to approximately $22.5 million for the same period in 06, a decrease of $1 million. These decreases were attributable to decrease fees paid for each of the 06/07 and 07/08 broadcast seasons.

Interest income for the quarter ended 12/31/07 was approximately $1.5 million as compared to $1.1 million for the same period in 06, an increase of approximately $.4 million. Interest income for the year ended 12/31/07 was approximately $5.3 million as compared to approximately $4.1 million for the same period in 06, an increase of approximately $1.2 million. These increases are a result of the increasing interest rate environment during the first half of 07 when compared with 06. Income tax expense, the net tax provision for the year ended 12/31/07 reflected a deferred tax expense of approximately $2.4 million related to the increase in the company’s tax evaluation reserve. The next tax benefit of approximately $3.5 million for the year ended December 31, 06 reflected a current tax benefit of approximately $3 million and a deferred tax benefit of approximately $45 million related to utilization of acquired operating loss carry backs and carry forwards and other acquired timing differences.

During the fourth quarter of 07, the company took a full tax valuation against its deferred tax assets resulting in charge to earnings of approximately $2.4 million. In addition, this prevented the company from recording an additional net tax benefit of approximately $9.5 million for the year ended 12/31/07 which would have served to reduce the company’s net loss during that period. As a result of the above the company had a net loss for the quarter and the year ended December 07 of approximately $16.8 million and $23.3 million respectively as compared to a net loss for the quarter and for the year ended 12/31/06 of $2.3 and $1 million respectively. Loss per share on a fully diluted basis was $1.26 per share and $1.77 per share for the quarter and for the year ended 12/31/07 respectively as compared to a loss per share of $0.18 per share and $0.08 for the same periods of 06. Diluted shares were approximately 13.2 million for both the quarter and year ended 12/31/07 respectively as compared to $13.1 for the same periods in 06.

Now, turning to the balance sheet. During 2007, the company’s cash and investments decreased by approximately $18.3 million primarily as a result of payments made to fund the company’s two startup entities TC Digital and TC Website as well as a temporary write down of some of the company’s investments. During 2007 liquidity issues began to affect the global credit and capital markets. As a result securities known as auction rate securities which historically have had a liquid market and had their interest reset periodically [inaudible] auctions, began to fail at auctions. These auction failures have caused auction rate securities to become [inaudible] liquid since investors are hesitant to purchase these types of investments as such in turn has caused the fair market value for these securities to decline. As of 12/31/07 the company held auction rate securities having an aggregate principal amount of approximately $60 million. The auction rate securities held by the company are private placement debt securities with long term nominal maturities and interest rates that reset monthly. The company’s investments in auction rate securities represent interest and debt obligations issued by bank’s insurance companies that at least had an A credit rating at the time of purchase by the company including bond insurers and reinsurers such as MBI, [inaudible], FSA, RAM and [Meridian]. Many of the [inaudible] held by the company at 12/31 have also experienced failed auction due to the liquidity issues described above. At 12/31/07 the estimated fair market value of the auction rate securities held by the company declined by approximately $4 million based upon statements provided by the investment banks through which the company holds such securities. All the ASR invested in by the company have continued to pay interest according to their stated terms and substantially all of the auction rates securities invested in by the company continue to be rated A or above.

The company reported an unrealized loss of approximately $4 million during 07 resulting in a reduction of stockholders’ equity. Based on the factors above and because the company has the ability and the intent to hold these investments until recovering their fair value which may not be prior to the maturity of the applicable security, the company is not considering the investments to be other than temporarily impaired. Although approximately $10 million in auction rate securities owned by the company as of 12/31/07 have been redeemed subsequent to year end the credit and capital markets including the market for auction rate securities has continued to deteriorate in 08. Then, there have been additional auctions effecting auction rate securities owned by the company. Although all the company’s investments in auction rates securities have continued to pay interest according to their stated term and substantially all of the securities invested in by the company continued to be rated A of above as of Feb 29, 08, the company unrealized loss on its auction rates securities has increased by $7.9 million to $11.9 million based upon statements provided by an investment bank through which the company holds such securities. Given the failed auctions many of the company’s auction rate securities are currently inliquid. Accordingly, the company has reclassified approximately $20.4 million in auction rate securities from current to non-current assets in the balance sheet due to the fact the company deems the liquidity of these securities to be restored in the period longer than 12 months.

Working capital consisting of current assets less current liabilities was approximately $65.1 million as of 12/31/07 and approximately $23.9 million as of 12/31/06. Stock repurchases, in May, 2007 8,205 shares of restricted stock at an average price of $17.13 per share was repurchased to discharge withholding tax obligations upon divesting of certain employees restricted stock rewards. In addition, in December of 07 the board of directors authorized the company to purchase up to 1 million shares of the company’s common stock from time-to-time through December 08 in the open market or through negotiated prices. The company purchased 94,000 shares at an average price of $12.09 per share in December of 07 under this authorization. As of March 14, 08 174,384 shares of the company’s common stock was subsequently purchased by the company under this authorization at an average price of $11.93 per share.

Now, I’d like to open up the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Liam Burke of Ferris, Baker Watts.

Liam Burke – Ferris, Baker Watts, Inc.

Could you help me on the long term investments? You said you reclassified the cash and short term investments of $20.4 million.

Bruce R. Foster

That’s correct.

Liam Burke – Ferris, Baker Watts, Inc.

On the balance sheet you’re showing $31.8, what is the difference there?

Bruce R. Foster

$31.8? I believe that’s a range note that comes due in 12 months.

Liam Burke – Ferris, Baker Watts, Inc.

I’m sorry?

Bruce R. Foster

It’s a range note that comes due in more than 12 months.

Liam Burke – Ferris, Baker Watts, Inc.

Okay. Then, on the $11.9 million on the reclassification on the deferred tax, where does that run through on the income statement?

Bruce R. Foster

Well actually it goes through income tax expense. So, what happens is we would really have had a benefit of $9.5 million at 12/31/07. We’re showing a $2.4 million expense.

Liam Burke – Ferris, Baker Watts, Inc.

Okay. Then, if I look at your SG&A of $44.2, is that an accurate run rate for 08? Or, are there any one times in there that we can back out?

Bruce R. Foster

That should be pretty accurate total. There might be some one times but I don’t think there’s many.

Alfred R. Kahn

Well, I would say yes there are a number that certain things will fluctuate relative to revenues. You know, cost of goods obviously would go up.

Liam Burke – Ferris, Baker Watts, Inc.

Right. That’s also in the cost of sales of the trading card line. I was just looking on the G&A side.

Alfred R. Kahn

As I told you we hope that’s going to be getting bigger. It will get much bigger because you’re going to end up selling and shipping more cards.

Liam Burke – Ferris, Baker Watts, Inc.

Okay. The last thing Al, can you just give us a sense to what the outlook is for the license revenues outside of Chaotic?

Alfred R. Kahn

I think that – for Chaotic or generally speaking?

Liam Burke – Ferris, Baker Watts, Inc.

Generally speaking, without Chaotic in the mix.

Alfred R. Kahn

I think that what has happened to the company, as you can probably imagine is we took two very, very extreme hits in the licensing business over the last couple of years. We lost Pokemon completely, remember Pokemon use to generate $80 million to us in sales. We lost it completely and obviously we’ve been struggling to replace that for the years that we lost it. We also started seeing decreases in Yu-Gi-Oh which have been the two biggest properties that the company has ever had. We expect that the revenues for licensing should, and again I say should somewhat stop hemorrhaging because again, as these big properties have gotten to a point where we think we can hold on to what we have and we can start rebuilding the licensing business with some of the new concepts that we have as well as sustaining the ones we currently have as well. So, I think that the hemorrhaging in licensing is probably going to be lessened and obviously we’re going to be looking at many, many new things to bring into this mix because it would certainly probably continually help to put more programming on which is certainly a way of driving properties. So, I think licensing and I think Chaotic licensing you certainly negate that, the non-trading card licensing side of the equation, we’re obviously selling licensing for Chaotic and they’ll be some Chaotic licenses out this year and certainly more in 2009. So, I think all told the licensing business will get better relatively to what we’ve been but certainly it’s going to take a long time to get back to the Pokemon era in terms of licensing.

Bruce R. Foster

Liam before you hang up, as far as the lower term, the other, just to give you a little bit more color, about half of that amount, that range was called away from us in January so we only really have about $25 million that’s really long term.

Operator

(Operator Instructions) Your next question comes from Joe Hovorka with Raymond James.

Joe Hovorka – Raymond James

A couple of questions, actually one housekeeping question and then a few on Chaotic. Housekeeping, you don’t really release a quarterly P&L on your fourth quarter, why do you not do that?

Bruce R. Foster

Well, it’s not required to do it under the filing regulations but, if you want I can supply you with that.

Joe Hovorka – Raymond James

Yeah, I’m just curious I just haven’t seen another public company not record a quarterly income statement, that’s all.

Bruce R. Foster

In the actual financial statement we give quarterly data.

Joe Hovorka – Raymond James

Right, right, when you file it with the SEC?

Bruce R. Foster

Yeah.

Joe Hovorka – Raymond James

Sure. Okay. A couple of questions here on Chaotic, your revenue in the fourth quarter, now is that all game and hobby or did you say there’s also some mass market in there?

Alfred R. Kahn

It’s all game and hobby.

Joe Hovorka – Raymond James

It is all game and hobby?

Alfred R. Kahn

Yes. We didn’t start shipping to the mass market until January.

Joe Hovorka – Raymond James

Okay. And that was GameStop and FYE, came first, right?

Alfred R. Kahn

That’s correct.

Joe Hovorka – Raymond James

And I think you mentioned that you do have a reserve in the fourth quarter against sales for returns? Did I hear that correctly?

Alfred R. Kahn

Yes we did.

Joe Hovorka – Raymond James

Okay. I thought the comic and hobby market was non returnable. Am I mistaken on that?

Alfred R. Kahn

Yes. You’re mistaken on the sense that the way that the card business works is that regardless of whether its comic and hobby or mass is controlled by a number of distributors and distributors are the same distributors that handle Wal-Mart, Target, Toys R Us, etcetera and they initially will not take products, initially unless there’s some form of – I don’t want to call it a full guarantee but some percentage of sales could be returned. Now, the good news is we’ve have surpassed that and probably right now none of the sales or very little of the sales currently shipping are under that secured premise. But, initially there definitely was that and that has sense been pretty much aggregated out.

Joe Hovorka – Raymond James

Aggregated out meaning that they’re not returnable now?

Alfred R. Kahn

Just by going past the threshold because they’ve reordered.

Joe Hovorka – Raymond James

Okay. I see what you’re saying, for the stuff that was shipped in the fourth quarter but not going forward. You’re still recording reserves against that?

Alfred R. Kahn

Well, we will actually pick those probably up in the first quarter.

Joe Hovorka – Raymond James

Those were shipped in the fourth quarter, right?

Bruce R. Foster

We do have some sales to GameStop and FYE in 2007 and those are really where our reserves are mostly at.

Alfred R. Kahn

And most of those will be reversed as we go into 2008.

Joe Hovorka – Raymond James

For the sales that were made in the fourth quarter is what you’re saying will be reversed?

Alfred R. Kahn

Yes.

Joe Hovorka – Raymond James

But then you’ll have to continue to record a reserve against for anything you sold in [inaudible] too is that correct?

Alfred R. Kahn

I think as a point of business practice we would have a reserve just to reserve anyway from the standpoint of defective returns, who knows. You’re not going to book 100% of the revenues in any business because you’re going to have some reserve. But, I think from a standpoint of is there a reserve relative to a return privilege, I think the return privilege will pretty much be expired in 2008.

Bruce R. Foster

Well, what we’ll have to do is we’ll look at each instance as a standalone situation. But, we’re not going to sit here and say that every sale that goes out the door is going to be a non-returnable situation. Each company and each distributor has its own way of doing business.

Alfred R. Kahn

Because again, it lessens over time.

Joe Hovorka – Raymond James

Right. Now, something like a Wal-Mart and a Target, are you selling through a distributor that goes to them or are you selling direct to those stores?

Alfred R. Kahn

Distributors.

Joe Hovorka – Raymond James

Okay.

Alfred R. Kahn

It’s very hard for any card company because what happens is the distributors basically own the space by these registers and they pay I guess Wal-Mart and Target to not only, and other stores, to own that space but to also rack job it very much the way that there use to be rack jobbing in the DVD business or rack jobbing in the magazine business. It’s a very similar type of situation.

Joe Hovorka – Raymond James

Okay. So, when you sell into like a Wal-Mart now there will be – let me ask it this way you’ve got a storefront number out, I think you said 15,000 store fronts you’re in now?

Alfred R. Kahn

Yes.

Joe Hovorka – Raymond James

Do you have product in all 15,000 store fronts?

Alfred R. Kahn

Yes. Coming into 15,000 we’ve got orders for these 15,000 store fronts. Now, whether everyone is in stock at this moment in time I can’t tell you. But, the orders have been coming in and we have been shipping against those orders.

Joe Hovorka – Raymond James

Right. So, you’ve got an order from Wal-Mart so for instance I don’t know whether they’ve got 4,000, 5,000 stores.

Alfred R. Kahn

We’re in every Wal-Mart store according to Wal-Mart. I think it’s 4,200 Wal-Mart stores and we’re being told by the distributor that Wal-Mart is putting us in every store.

Joe Hovorka – Raymond James

Okay. Do you know when that hit Wal-Mart? I’m just asking because we had trouble finding them in Wal-Mart.

Alfred R. Kahn

The good news is that they’re selling, you’re not going to reach the sales if you’re going very, very quickly.

Joe Hovorka – Raymond James

Right. We didn’t have trouble finding them because they were sold out it was because they didn’t get any.

Alfred R. Kahn

Okay. Well, that’s possible but I think we expect that during the first quarter of 08, right now, by the end of this quarter they should be in propagating in every one of the stores.

Joe Hovorka – Raymond James

Okay.

Bruce R. Foster

What traditionally happens is the way they roll it out, they roll it out to their more popular stores, or the ones that have the best traction going forward and then as the property comes in more and more then they roll it out to those other stores.

Joe Hovorka – Raymond James

Okay. And, how many boxes, cases, however you might look at it would a typically bid box like a Wal-Mart or Target stock?

Alfred R. Kahn

A 16 week supply.

Joe Hovorka – Raymond James

16 weeks supply?

Alfred R. Kahn

About a 16 week supply. They try to stay within a 16 week supply and it’s a rolling 16 weeks so as they’re sales go up then that number is increased. So, what happens is because we haven’t been out there that long we’re not sure what a 16 week supply is yet.

Joe Hovorka – Raymond James

Right.

Alfred R. Kahn

So we expect it to be larger than what is currently suggested as a 16 week supply.

Joe Hovorka – Raymond James

Okay. Then, are the other, the GameStop, FYE, are those similar type numbers? Or, are they more or less?

Alfred R. Kahn

Again, I don’t know specifically how they stock but or sell throughs have been very, very significant in those stores. So, they’re reordering, I can’t tell you exactly what they’re plans, what they’re thoughts are on how many weeks supply they hold on to. And again, we’re in the process, we print these cards pretty quickly so all that is very positive.

Joe Hovorka – Raymond James

Right. And when you talk about these jobbers, or whatever having this shelf space around the cash registers, who makes the ultimate decision on stocking it? Is it Wal-Mart or is it this guy who controls the shelf space?

Alfred R. Kahn

I think it’s rate of sale. I think it truly comes down to the rate of sale. It’s a very simple thing, if they see something is starting to get traction greater than something else, they move more pegs into the things that are tractioning heavier than they do with the thing that’s not. So, we’ve seen some peg increases as well. We started out with two pegs and now we’re going to four pegs and some places six pegs and I think that’s another indicative indication of how the things doing, to see how many pegs it’s getting. Look at card racks now, Pokemon has got the majority of pegs, Yu-Gi-Oh is probably the second amount of pegs and then from there it could be us or it could be Naruko or something of that nature. But, I think part of the indicator is to see how many pegs you have and are you expanding that peg count.

Joe Hovorka – Raymond James

Okay. Then a question on the website, I guess you’ve pushed the beta test back to now the middle of April when it is suppose to end and I think that’s back what four to six weeks from the original thought and then it also looks like the 6x6 game play is off the shelf at this point for that mid April release and there’s kind of an indefinite time frame as to when that would happen, is that correct?

Alfred R. Kahn

Yes.

Joe Hovorka – Raymond James

Okay.

Alfred R. Kahn

You have to understand, we’re learning more and more about the website and how the kids are using them and we’re adjusting our development plan to where we think the kids are most anxious to get involved. The game is a very – it has multi levels of complexity that you can play the game at a multi number of levels, that’s what makes it so exciting. You can play it very simplistically using apprentice rules or you can use the [inaudible] location cards and make it very complex using master rules. What we’re finding is that the kids want to go from one step to another so we’re trying to help them by getting more and more of the 1B1 play back in and giving them a chance to master the game before we force them to go to the 6x6 which is a more difficult game. And our age line with these are so broad, kids who are buying cards could be between kids start at six and of course kids who game play are 18, 19, 20 who are playing more difficult games. So, I think what we’re learning as we keep on delving into the data is that a lot of kids are doing nothing but uploading cards and watching their cards upload. A lot of kids are trading cards, the trading feature on the web is very popular. Essentially you put your cards up and you can trade with other kids. So, we’re trying to constantly monitor what they’re doing and constantly give them more of the experiences they’re looking for and the 6x6 experience they certainly will want down the road but they’re much more interested right now in uploading, trading, talking on the forum and getting back to that 1B1 game which is a very simple game. We’re going to do what the kids and our players are telling us what they want and being in beta is not anything more than just suggesting that we’re constantly changing and upgrading.

Operator

There are no further questions. I’d like to now turn the floor over to management for closing remarks.

Alfred R. Kahn

I think it’s obviously that what we started talking about three years ago is starting to now come to fruition. The idea of changing a company from a straight licensing company that was promoting other people’s brands to a traditional entertainment company which is obviously promoting not only other people’s brand but also promoting its own brands. I think one of the things we’ve talked about with the success of Chaotic, expansion of the website, the obvious change in our broadcast strategy, all will lead to extraordinarily positive results of the business moving forward and what we need now is everybody to stay on track and stay together so we can sustain making these events happen. I want to thank you for all that and I want to thank you for your support and know that it’s something that I think should get rewarded as we start to move forward. Thanks very much.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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